Bank Lending and Monetary Policy: Evidence on a Credit Channel

Abstract

While there is widespread agreement that banks play a key part in the transmission of monetary policy actions to the economy, there is considerable controversy over the precise role that banks play. The focus of this debate is whether bank lending plays a special part in the monetary transmission mechanism. If a special lending or credit channel exists, changes in the willingness and ability of banks to extend credit may have implications for aggregate economic activity. Moreover, ongoing changes in the role banks play in financial markets may affect this credit channel and so alter the monetary transmission mechanism. Recent research on a bank credit channel has focused on two questions. Are certain borrowers so dependent on bank lending that any change in banks ’ willingness to lend immediately affects investment and spending decisions? And, do monetary policy changes directly constrain bank lending? Both conditions are necessary for bank lending to play a special role in the monetary transmission mechanism. Thus far, research on a credit channel has yielded mixed results. Some recent

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